"This is an example of the arrogance of occupation. It's a humiliation for the entire Palestinian people, Christians and Muslims... Sharon is playing with fire -- he wants blood and tears instead of Christmas carols." Arafat appointed "cabinet minister" Yasser Abed Rabbo JERUSALEM, Dec 23 (Reuters) - Palestinian President Yasser Arafat vowed on Sunday to celebrate Christmas in Bethlehem despite Israel's decision to block his annual pilgrimage to the town where Jesus was born.

Israel's security cabinet said it decided in a telephone vote to bar Arafat's journey to Bethlehem, through Israeli-controlled territory in the West Bank, because he was not acting "to dismantle Palestinian terror organisations."

Palestinian officials said diplomatic efforts were under way, with mediation by the United States, European Union and United Nations to persuade Israel to lift the ban.

Arafat remained defiant, telling reporters on Sunday that "no one can prevent me from going" to Palestinian-ruled Bethlehem. He said earlier he would visit the town "even if I have to go there on foot."

It would be an impractical step for the 72-year-old leader, a practising Muslim, who would have to hike more than 20 km (12 miles) through hilly West Bank terrain to reach Bethlehem from his Ramallah headquarters to the north.

A Palestinian cabinet minister branded the ban as proof of what he called Israel's arrogance in its continued occupation of parts of the West Bank and a humiliation for Palestinians.

Israel destroyed Arafat's personal helicopters in the Gaza Strip and stationed tanks near his Ramallah office after a Palestinian attack on an Israeli bus near a Jewish settlement in the West Bank killed 10 people on December 12.

It subsequently declared Arafat irrelevant and along with the United States and the European Union piled pressure on him to dismantle militant groups behind a wave of suicide bombings in Israel that killed 29 people in the last month.

But Israel's biggest newspaper reported on Sunday that Israeli Foreign Minister Shimon Peres had drafted an interim peace plan that would establish a Palestinian state on 42 percent of the West Bank and most of the Gaza Strip.

Arafat has attended Christmas Eve services at Bethlehem's Church of the Nativity since the town came under Palestinian rule in 1995.

"This is an example of the arrogance of occupation. It's a humiliation for the entire Palestinian people, Christians and Muslims," Palestinian cabinet minister Yasser Abed Rabbo told Reuters.

"Sharon is playing with fire -- he wants blood and tears instead of Christmas carols," he said.

Israeli government spokesman Dore Gold said Bethlehem -- currently surrounded by Israeli tanks and largely empty of tourists after 15 months of Israeli-Palestinian violence -- would be open to Christians for holiday worship.

"This is a season of charity around the world...but Yasser Arafat does not demonstrate the same degree of charity when it comes to the lives of Israelis," Gold told Reuters.

Gold said two Palestinian suspects in the assassination of an Israeli cabinet minister in October are "right down the block from (Arafat) in Ramallah...We are expecting him to act."

The Palestinian Authority has said it has arrested dozens of militants, although Israel says it has yet to target the masterminds behind attacks on Israelis.

The arrests have fuelled internal Palestinian strife. Six Palestinian teenagers were killed and more than 80 wounded in a Gaza gun battle on Friday between Palestinian police and militants angered by the roundup.

The clashes were among the worst since the Palestinian Authority was set up in 1994 and marked one of the most serious internal challenges to Arafat's leadership.

The militant Hamas movement said on Friday it was halting attacks in Israel until further notice in the interests of Palestinian unity. Officials of Islamic Jihad put out mixed signals about whether the group would follow suit.

Israel has said the announcements by some militants were part of a secret deal with Arafat to avoid his crackdown. Palestinians say it is now Israel's turn to ease the conflict.

The militant groups, which oppose Israel's existence, say their attacks retaliate for Israel's use of force in combating the Palestinian uprising against occupation.

At least 790 Palestinians and 233 Israelis have died since the uprising began in September 2000 after peace talks froze.

PERES SAYS: LET ARAFAT GO TO BETHLEHEM

Peres said Arafat should be allowed to go to Bethlehem.

"I don't want our prevention of Arafat visiting Bethlehem to become the talk of Christmas around the Christian world...Let him go, pray, do what he wants to do," Peres told Army Radio.

The Yedioth Ahronoth newspaper reported that Peres has drafted an interim peace plan for a Palestinian state and presented the proposal to Palestinian leaders. Sharon's office dismissed the reported plan as fiction.

Yedioth Ahronoth said Peres proposed a Palestinian state be set up on the 42 percent of the West Bank and most of Gaza now under Palestinian rule no later than two months after an interim deal is signed. Talks on a final accord would then begin.

Peres had no immediate comment on the report. A Palestinian cabinet minister also poured cold water on the proposal, saying the Palestinians could not accept anything less than a state in all of the West Bank and Gaza.

BETHLEHEM, West Bank, Dec 23 (Reuters) - No room at the inn? The 210-room Bethlehem Hotel has 208 of them free for this Christmas Eve.

Tourists and pilgrims that once filled the city for the Christmas celebration of Jesus's birthday are not coming, scared off by fighting in Bethlehem between Israelis and Palestinians during a 15-month Palestinian uprising.

Even Palestinian President Yasser Arafat's annual entourage might not be taking up space this year. Israel said on Sunday he had to do more to crack down on militants if he wanted to cross its territory to pay his traditional Christmas visit.

"We have two reservations for Christmas Eve and then we don't have any for the next year," said 24-year-old front-office manager Minerva Arja in the echoing emptiness of the Bethlehem Hotel's reception.

Arafat came to the hotel opening in the West Bank city in 1996, when hopes still ran high a deal might be reached to end decades of conflict between Palestinians and the Jewish state.

The Palestinian uprising started after peace talks stalled in September 2000, but last Christmas the hotel had at least a handful of guests who came to visit the place where Jesus was born in a stable because local inns were packed full.

"Last year you could still feel that it was Christmas in Bethlehem. This year it is different. The visitors are not coming. There is nothing, nothing, not even decorations," Arja said.

Before thinking of lights and tinsel, the priority for city authorities is patching up streets and re-erecting signposts -- smashed when Israeli armour rolled into Bethlehem in October after Palestinian militants assassinated an Israeli cabinet minister in retaliation for Israel's killing of their leader.

Israel has since pulled back its troops to Bethlehem's outskirts.

It said on Sunday that Arafat had failed to deal with militants who have killed scores of Israelis and it would not let the Palestinian leader, a practising Muslim, cross from his Ramallah headquarters to Bethlehem to join Christian prayers.

Up the road from the Bethlehem, the Paradise Hotel used to proudly display a picture of Arafat meeting the Russian Orthodox patriarch. Now, the lobby is hung with strands of twisted metal and scattered with broken glass instead of festive decorations.

Rooms are soot black and the staff says nobody has money to repaint them.

Paradise was lost in October, when Israeli soldiers kicked in the doors and made it an outpost, drawing the fire of Palestinian gunmen from across a little valley.

"When we said we wanted to go in to inspect the hotel, the Israelis held their guns in our faces and told us to go away," sales manager Elias al-Atrash said.

"After they left, we found it was completely ruined," he said, pointing to a dried smear of blood on a doorframe. "I do not know how many fires there were started here, but everything will have to be replaced.

"We have no money to repair it and I don't have anything from either side to suggest that they will."